Help needed! - first deal, need to estimate CapEx

[Michael Wayne]

BP Family, 

My partner and I are about to put an offer in on our first multi-family property in Oakland County, MI. We've built out a model and really like where our numbers are at, but the one variable we're having trouble estimating is the CapEx budget. I've read that 8% of gross rents is a safe target, but I want to get more granular than that.

Here are some details: 

- 12 units 

- ten 1-bedrooms, two 2-bedrooms 

- Covered parking garage

- Asphalt driveway 

Capital improvements made recently:

- Window replacement (summer of 2014)

- New roof on main building & Car Port (summer 2018) 

- Replacement of entire driveway and uncovered parking

- Gutters Replaced with Commercial Gutters 

- New concrete in courtyards between car ports and building 

- installed cameras with 10-day DVR loop 

Post LOI, we plan to do a full inspection to check on HVAC systems, but we want to still put in an informed offer and ensure the property is still worthwhile with a budget for CapEx built into our projections.

Anyone have any best practices for this type of property? 

Thank you, thank you!

[Ben Leybovich]

Originally posted by @Michael Wayne:

@Ben Leybovich while I agree that revenue and CapEx are largely uncorrelated, I think the metric is an effort to create some sort of benchmark that you can manipulate based on the specifics of the deal.

It sounds like you probably have a better suggestion?

We are about to close 160 units. My business plan includes about $9,500 of interior reno, which means that I am replacing everything, cabinets, fixtures, appliances. Etc.

My desired exit is 3-5. However, I underwrite 10. Even if I am in the property for 10 years, there shouldn't be any major CapEx inside.

Past that, I am coming in with reserves for everything from water heaters, to HVAC, to roof. A lot of reserves...

Considering the business plan, lender is requiring only $250 per door per year of CapEx withholding. Typically I'd say that's extremely low, but because we're replacing everything to begin with and because we're coming in with large amount of reserves, this is fine.

To conclude, the better suggestion I can offer is a better business plan. If you are buying a building in today's environment it needs to be value add. And if it's going to be value add, you might as well find one that can support doing a lot of the CapEx upfront, and then you won't have to worry about how much to hold back.

Hope this helps.